Trade Associations Support House Covered Bond Bill

Three major trade associations have announced support for H.R. 5823, a bill seeking to establish a covered bond market in the U.S. that is currently being debated by the House Financial Services Committee.

The legislation is called H.R. 5823 and sponsored by Reps. Scott Garrett (R-N.J.) and Paul Kanjorski (D-Pa.).

In a letter to committee members, American Securitization Forum (ASF) Executive Director Tom Deutsch wrote that "a robust private securitization market, which would include covered bonds, is essential to the gradual withdrawal of the government from its almost exclusive role in financing residential mortgages."

The ASF added that covered bonds are consistent with the risk retention requirements presented in the financial reform bill just enacted by Congress.

"We appreciate and support the committee's swift action in considering H.R. 5823, and we encourage the committee to pursue passage by the full House this year," Deutsch concluded.

The Securities Industry and Financial Markets Association (SIFMA) and its U.S. Covered Bond Council (USCBC) expressed their support for the legislation in a letter to Reps. Barney Frank (D-Mass.) and Spencer Bachus (R - AL) of the House Financial Services Committee.

SIFMA’s letter identified aspects of the bill as the “essential building blocks” in moving forward with the creation of a U.S. covered bond market.

The industry association said that a comprehensive and legislative framework for covered bonds are necessary to provide investors with legal and regulatory certainty, drawing specific attention to the treatment of the cover pool securing the covered bonds in default and insolvency.

According to SIFMA, covered bonds can provide a stable source of long term private capital and liquidity to fund mortgage, public-sector, and small business loans, helping to support the financial system and the economic recovery. “Covered bonds represent an untapped and proven resource that can provide added liquidity to our credit markets by appealing to an investor base beyond buyers of typical secured borrowings and securitizations,” the association wrote in its letter to Frank and Bachus.

Additionally, SIFMA identified the covered bond sector as consistent mechanism for achieving additional policy objectives, including the desire for issuers to have “skin in the game.” It cited the stabilizing force of Europe’s use of covered bonds for the past 200 years.

The CRE Finance Council has also indicated strong support for the bill by urging lawmakers to consider the initiative.

Garrett’s and Kanjorski’s bill would create a covered bond market in the U.S. that would include high-quality commercial mortgages and CMBS as eligible collateral in the newly created framework, according to the CRE Finance Council.

The Council expressed its support for a covered bond market and its belief that the sector provides a new and diverse funding mechanism that could offer additional sources of capital and liquidity.

The association said that the bill could also level the playing field with Europe, which already has a covered bond market that includes CMBS.

"The CRE Finance Council strongly supports efforts to facilitate a U.S. covered bond market as an additive financing tool to promote commercial real estate lending and investing," said Lisa Pendergast, President, CRE Finance Council. "Covered bonds should not and cannot replace CMBS as a capital source for commercial mortgages, but these instruments could provide another source of liquidity to help provide much needed capital to fund commercial real estate."

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